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Turbulence ahead for Virgin Australia

Matt O'Sullivan

Virgin Australia has warned that trading conditions for this financial year remain uncertain as economic troubles overseas weigh on the minds of Australian consumers.

Australia's second-largest airline has also expanded its code-share alliance with Singapore Airlines to cover more destinations in Australia, Asia and Europe.

Virgin has not issued specific earnings guidance but told shareholders at its annual meeting in Brisbane on Tuesday that it expects the negative consumer sentiment to persist over the short to medium term.

It reiterated that it anticipates an improvement in underlying earnings in the new financial year, compared with its pre-tax profit of almost $83 million in 2011-13.

Virgin's chief executive, John Borghetti, said he expected the airline to post stronger underlying earnings in 2012-13 but "the uncertainty in economic conditions and the particularly competitive environment precludes us from providing profit guidance for the year".

Mr Borghetti said the airline expected a more "balanced mix" in terms of its revenues in the first and second halves of the financial year.

Historically, Virgin and Qantas have made the bulk of their earnings in the first-half.

In a dig at its main rival, Mr Borghetti said Virgin would stick with its focus on yield and margin improvement as "opposed to an overall group market share goal".

Qantas and Jetstar have sought to maintain their combined share of the domestic market at 65 per cent.

Although there are signs that Australia's four largest airlines are returning to more rational increases in capacity, the battle over the last six months threatens to significantly dent their earnings this financial year.

Qantas issued guidance last week which revealed that its core earnings may at least halve in the first-half of this financial year as it bears the brunt of intense competition in the domestic market.

Virgin's expectation of an improvement in underlying pre-tax profits this year excludes the impact of its attempt to take control of Tiger Australia and West Australian airline SkyWest.

In a big challenge to Qantas, Virgin last month revealed plans to buy a 60 per cent stake in Tiger, make a $47 million takeover bid for West Australian airline Skywest and tighten its close ties with Singapore Airlines. The latter has bought a 10 per cent stake in Virgin.

Virgin's bid for a controlling stake of Tiger needs approval from the competition regulator.

Air New Zealand disclosed on Monday that it maintained its stake in Virgin at 19.99 per cent.

Virgin's other major shareholders include Sir Richard Branson's Virgin Group with a 26 per cent stake, and Middle Eastern airline Etihad, which has a 10 per cent holding.